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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


THE  RAILROADS  AND 
THE  PEOPLE 


By  E.  P.  RIPLEY 

President  of  The  Atchison, 

Topeka  and  Santa  Fe 

Railway  Company 


Appearing  in  "The  Atlantic  Monthly"  of  January,  1911 


SHALL  RAILWAY  RATES 
BE  RAISED? 

By  WALKER  D.  HINES 


Chairman  of  the  Executive  Com- 
mittee of  The  Atchison,  Topeka 
and  Santa  Fe  Railway  Company 


Appearing  In  "The  Outlook"  of  December  10, 1910 


I 


THE  RAILROADS  AND  THE  PEOPLE 

By  E.  P.  RIPLEY 

There  is  just  one  point  about  the  present  relations  between  the 
railroads  and  the  people  of  the  United  States  as  to  which  all 
agree.  This  is  that  they  are  very  unsatisfactory.  Opinions  differ 
as  to  why  this  is  so.  Many  say  that  the  roads  themselves,  by 
numerous  sins  of  omission  and  commission,  raised  and  have  pro- 
longed the  storm  of  hostile  public  sentiment  which  has  been  sweep- 
ing over  them  for  some  years.  The  shortcomings  and  abuses  in 
railway  management,  it  is  argued,  have  made  necessary,  for  the 
protection  of  the  public,  strict  and  detailed  public  regulation ; 
and  railway  owners  and  managers,  it  is  asserted,  have  not  met 
in  the  right  spirit  eft'orts  to  secure  such  regulation.  Senator 
A.  B.  Cummins  of  Iowa  expressed  a  widely-taken  view  when  he 
said  on  August  17  in  a  letter  to  me,  "The  trouble  with  the  railway 
owners  and  railway  managers  is  that,  instead  of  loyally  and 
finally  accepting  the  supervising  and  regulating  power  of  the 
government,  and  helping  to  make  its  exercise  fair  and  effective, 
they  resist  every  proposal  to  enlarge  public  authority,  and  resent 
every  attempt  to  interfere  with  their  management.  The  outcome 
is  constant  irritation  and  increasing  turmoil." 

Railway  managers  do  not  deny  that  many  mistakes  have  been 

-—made  and  many  abuses  have  grown  up  in  the  development  and 

(Jadministration  of  American  railways.    I'ut  they  do  deny  the  truth 

^and  fairness  of  many  of  the  counts  in  the  sweeping  indictments 

I — of  the  roads  that  have  been  made  and  printed  throughout  the 

_ country,  and  feel  strongly  that  most  of  the  public  hostility  to  the 

^carriers  is  unjust.     They  do  not  doubt  that  the  ])ublic  means  to 

/'Abe  fair.     But  they  feel  that  it  has  allowed  itself  to  be  misled,  to 

its  own  injury,  by  these  wholesale  charges  of  wrong-doing.    They 

V  believe  that  some  of  the  legislation  that  has  been  passed  recently 

'^is  wholesome.     But  they  think  that  many  laws  that  have  been 

'  enacted,  and  many  projects  for  further  regulation  which  are  re- 

._i_ceiving  popular   support,   are   unwise,   because   they   aim    to   do 

-'  '  things  that  are  undesirable,  or  to  secure  ends  the  attainment  of 

'"-'  which  would  be  impracticable  even  if  it  were  desirable. 

56989'7 


Railway  transportation  is  one  of  our  largest  industries.  It 
employs  over  a  million  and  a  half  of  men  to  whom  have  been 
paid  over  a  billion  dollars  in  wages  in  a  single  year.  The  con- 
cerns that  make  and  deal  in  railway  equipment  and  supplies, 
whose  prosperity  depends  on  that  of  the  railways,  employ  per- 
haps as  many  more.  Upon  the  amount  their  employers  can  pay 
these  men  depends  the  amount  they  can  spend  with  the  local 
merchant.  Upon  how  much  goods  the  local  merchant  can  sell 
depends  the  quantity  he  can  buy  from  the  jobber.  Upon  how 
much  the  jobber  can  sell  depends  upon  how  much  he  can  buy  from 
the  manufacturer.  And  upon  how  much  the  manufacturer  can 
sell  depends  how  much  wages  he  can  pay  and  how  much  raw 
materials  he  can  purchase.  Therefore,  the  prosperity  of  the  entire 
country  depends  to  a  very  large  degree  on  the  prosperity  of  the 
transportation  industry.  I  do  not  take  the  narrow  view  that  this 
is  true  only  of  the  transportation  industry.  But  how  much  all 
classes  will  be  affected  by  the  condition  of  any  industry  depends 
on  how  large  and  important  it  is,  and  how  extensive  are  its  rami- 
fications ;  and  the  prosperity  of  all  depends  so  much  on  the  con- 
dition of  the  transportation  industry  because  it  is  the  largest,  the 
most  important,  and  the  most  extensive  in  its  ramifications, 
except  agriculture. 

The  country  has  been  feeling  the  effects  for  the  last  three 
years  of  an  unhealthy  condition  of  the  railway  business.  If  the 
railways  had  spent  as  much  in  proportion  during  this  time  for 
operation  and  additions  and  betterments  as  they  did  in  1907, 
their  expenditures  for  these  accounts  would  have  been  during 
this  period  about  four  hundred  million  dollars  larger  than  they 
were.  If  there  had  been  during  the  last  three  years  as  much 
new  railway  construction  in  proportion  as  there  was  in  1907, 
the  mileage  built  would  have  been  seventy-two  hundred  miles 
greater  than  it  was,  which  would  have  involved  an  additional 
expenditure  of  approximately  three  hundred  million  dollars. 
Who  can  doubt  that  the  fact  that  the  railways  during  these  years 
greatly  curtailed  their  expenditures  has  been  one  of  the  main 
influences  protracting  the  depression  ?  In  order  to  keep  abreast 
of  the  growth  of  commerce  they  should  have  increased  instead 
of  reducing  their  expenditures. 

That  the  relations  of  the  railways  and  the  people  have  not 
been  put  on  a  better  basis  has  not  been  because  there  is  any  an- 
tagonism between  their  interests,  but  largely  because  the  officers 


of  the  railways,  on  the  one  hand,  and  the  leaders  of  pubHc  opin- 
ion, on  the  other,  often  have  not  approached  the  subject  in  the 
right  spirit.  It  would  be  a  thankless  and  fruitless  task  to  inquire 
who  has  been  the  more  to  blame ;  both  sides  have  been  at  fault. 
The  discussion  of  railway  regulation  has  too  often  resolved  itself 
into  arguing  over  what  rights  are  guaranteed  to  the  railways, 
and  what  pov.-er  over  them  is  given  to  the  people  by  the  Fed- 
eral Constitution.  Now,  it  is  very  desirable  that  the  relative  con- 
stitutional rights  of  the  public  and  the  carriers  should  be  clearly 
defined,  thoroughly  understood,  and  faithfully  respected.  But  the 
people  and  the  railways  have  a  relation  which  is  even  more  im- 
portant than  their  constitutional  relation.  This  is  the  relation 
indicated  by  the  subject  on  which  the  editor  of  the  Atlantic 
Monthly  has  asked  me  to  write — their  "ethical  relation."  An 
ethical  relation  involves  reciprocal  duties,  and  the  constitutional 
rights  of  the  railway  and  the  constitutional  power  of  the  public 
do  not  mark  the  boundaries  of  their  duties  to  each  other.  There 
are  many  things  railways  ought  to  do  for  the  convenience  and 
benefit  of  the  public  that  they  could  not  constitutionally  be  forced 
to  do.  And  on  the  other  hand,  the  criterion  of  the  duty  of  the 
public  as  to  adopting  any  proposed  policy  regarding  the  railways 
is  not  merely  whether  it  would  be  constitutional,  but  whether 
it  would  be  just  to  the  railways  and  for  the  good  of  the  people. 
The  proper  relation  between  the  railways  and  the  people  is 
that  which,  not  merely  temporarily,  but  in  the  long  run,  will  best 
promote  the  "greatest  happiness  of  the  greatest  number." 

The  formulation  of  correct  general  principles  is  important. 
Their  practical  application  to  specific  cases  is  more  important, 
and  also  more  difficult.  The  principle  that  the  proper  ethical 
relation  between  the  railroads  and  the  people  is  that  which  will, 
in  the  long  run,  best  promote  the  "greatest  happiness  of  the 
greatest  number"  is  easy  to  formulate ;  it  will  be  universally  ac- 
cepted ;  but  wide  differences  of  opinion  will  arise  as  to  its  appli- 
cation. Yet  it  must  be  applied  to  practical  affairs  to  be  of  any 
value. 

The  part  of  the  railroafl's  business  which  has  received  the 
most  discussion  and  regulation  is  its  rates.  Both  the  law  and 
sound  ethics  require  rates  to  be  "fair  and  reasonable ;"  that  is, 
equitable  as  between  dififerent  commodities,  shippers,  and  locali- 
ties, and  not  exorbitant. 

Two  widely  different  theories  have  been  advanced  as  those 


which  ought  to  govern   the  making  of  rates.     These   theories 
may  be  denominated  as — 

(1)  The  value  of  the  service. 

(2)  The  cost  of  the  service. 

The  railroads  themselves  (and  I  think  nearly  all  intelligent 
students  of  the  question)  advocate  the  former.  There  is  little 
difference  in  the  cost  of  transporting  a  car  of  automobiles  and  a 
car  of  sand,  yet  it  is  manifest  that  a  rate  which  would  be  much 
less  than  fair  for  the  automobiles  would  prohibit  the  movement 
of  the  sand ;  therefore,  the  rate  on  the  sand,  if  moved  at  all, 
must  be  actually  less  than  the  average  cost  of  moving  all  freight, 
while  the  rate  on  the  automobiles  must  be  very  largely  in  excess 
of  the  average  cost.  A  mere  statement  of  this  proposition  should 
suffice  to  prove  it.  There  is  one  point  regarding  this  matter  that 
many  forget:  this  is  that  in  all  affairs  there  are  two  kinds  of 
discrimination.  There  is  the  kind  which,  as  the  dictionary  ex- 
presses it,  "sets  apart  as  being  different,"  which  "distinguishes 
accurately,"  and  there  is  the  widely  different  kind  which  "treats 
unequally."  In  all  ordinary  affairs  of  life  we  condemn  as  "un- 
discriminating"  those  who  have  so  little  judgment  of  fairness 
as  not  to  "distinguish  accurately"  or  "set  apart  things  that  are 
different" — who  either  treat  equally  things  that  are  unequal,  or 
treat  unequally  things  that  are  equal.  Now,  when  the  railway 
traffic  manager  "sets  apart  things  that  are  different,"  and  treats 
them  differently,  he  simply  does  what  it  is  the  duty  of  everyone 
to  do. 

This  shows  what  is  meant  by  basing  rates  on  the  "value  of 
the  service" — on  "what  the  traffic  will  bear."  This  method  of 
making  rates  has  been  widely  and  vigorously  denounced ;  but, 
when  properly  carried  out,  it  is  merely  the  "setting  apart  of  things 
which  are  different"  in  a  way  that  is  highly  beneficial.  The  free 
movement  of  all  commodities  promotes  the  "greatest  good  of 
the  greatest  number;"  and  as  the  adjustment  of  the  rates  on  the 
various  commodities  roughly  in  proportion  to  the  value  of  the 
services  rendered  in  hauling  them  is  an  imperative  condition  to 
the  free  circulation  of  the  cheaper  and  bulkier  commodities,  in  so 
adjusting  its  rates  the  railway  simply  does  its  public  duty.  At 
all  events,  this  policy  has  built  up  the  business  of  the  country  to 
its  present  proportions. 

Alany,  while  conceding  that  the  rates  on  different  commodi- 
ties must  be  adjusted  according  to  the  value  of  the  service,  con- 


tend  that  the  rates  for  different  hauls  of  the  same  commodity 
should  be  based  on  cost,  or  on  distance,  which  is  a  rough  measure 
of  cost.  Railroad  men  do  not  believe  that  rates  ought  always 
to  increase  in  proportion  to  distance.  They  believe  that  here 
again  we  should  "set  apart  things  that  are  different."  All  states- 
men and  economists  agree  that  free  industrial  and  commercial 
competition  promotes  the  public  welfare.  Now,  the  policy  of 
American  railways  in  generally  making  their  rates  lower  in 
proportion  for  long  than  for  short  distances — in  basing  them  on 
the  value  rather  than  the  cost  of  service — has  enabled  producers 
throughout  a  large  territory  to  compete  in  every  market,  and 
consumers  to  get  commodities  from  every  point  of  production 
in  that  territory ;  and  has,  therefore,  I  believe,  been  of  great 
benefit  to  the  public. 

Many  persons  who  concede  that  distance  must,  to  a  consider- 
able extent,  be  disregarded,  argue  that  at  least  there  can  be  no 
excuse  for  so  far  ignoring  it  as  to  charge  a  higher  rate  for  a 
shorter  than  for  a  longer  haul  over  the  same  line.  But  this, 
again,  is  often  merely  "setting  apart  things  that  are  different." 
When  a  railway  makes  a  lower  rate  for  a  longer  than  for  a 
shorter  haul,  it  is  usually  because  it  meets  controlling  competition 
either  by  water  or  by  rail  at  the  more  distant  point,  which  it  does 
not  meet  at  the  nearer  point.  It  could  no  more  afford  to  make 
rates  proportionately  as  low  to  the  intermediate  as  to  the  more 
distant  point  than  it  could  afford  to  make  as  low  rates  on  all 
commodities  as  it  makes  on  sand.  If  it  quit  meeting  the  com- 
petition at  the  more  distant  point,  the  shipper  at  the  nearer  point 
would  not  be  benefited,  because  he  would  still  have  to  pay  the 
same  rates  as  before,  while  the  shipper  at  the  more  distant  point 
would  still  be  able  to  get  his  goods  by  the  competing  rail  or  water 
line  at  the  same  rate  as  before.  The  railway  which  had  with- 
drawn from  competing  would  be  injured,  because  it  would  no 
longer  get  any  of  the  competitive  traffic ;  and  shippers  and  con- 
sumers at  the  more  distant  points  would  be  injured,  because  they 
would  no  longer  enjoy  the  benefit  of  its  competition  with  the 
other  lines  serving  them. 

This  shows  that  the  "greatest  good  of  the  greatest  number" 
is  often  best  promoted  by  almost  entire  disregard  of  distance  in 
rate-making. 

No  doubt  many  will  say  that  theoretically  the  value-of-the- 
service   principle   is   right,   but   that   many   mistakes   have   been 


made  and  many  abuses  have  developed  in  its  application.  This 
is  quite  true;  there  have  been  many  discriminations  which  have 
consisted  in  "treating  unequally,"  and  for  them  the  railways  de- 
serve condemnation.  But  unfair  discriminations  in  rates  afford 
the  best  illustration  of  the  fact  that,  in  order  that  the  railway 
may  do  its  full  duty  to  the  public,  the  public  must  do  its  duty  to 
the  railway.  Secret  rebating  has  been  practically  extirpated.  For 
the  fact  that  it  and  other  forms  of  unfair  railroad  discrimination 
continued  so  long,  and  that  some  still  exist,  the  public  is  much 
to  blame.  Since  the  original  Interstate  Commerce  Act  was  passed, 
there  has  not  been  a  time  when  our  laws  regulating  railways 
have  not  been  so  inconsistent  and  conflicting  that  railway  men 
could  not  obey  one  part  of  them  without  violating  another  part. 
The  best  parts  of  the  Interstate  Commerce  Act  are  those  pro- 
hibiting unfair  discrimination.  The  big  shippers  and  large  cen- 
ters of  industry  and  commerce  control  a  great  deal  of  traffic. 
By  withholding  their  business  from  roads  which  will  not  give 
them  unfair  concessions,  and  giving  it  to  those  which  will,  they 
have  got  many  unfair  advantages.  In  compliance  with  the  pro- 
visions of  the  Interstate  Commerce  Act,  and  in  the  performance 
of  their  duty  to  the  public,  the  railways  ought  to  abolish  these 
unfair  discriminations.  But  to  do  so,  all  competing  railways 
must  act  in  concert  regarding  rates ;  and  under  the  Sherman 
Anti-Trust  Law  such  a  perfectly  reasonable  and  salutary  com- 
bination by  the  railways  has  been  held  to  be  an  illegal  conspiracy ! 
In  other  words,  existing  laws  forbid  the  railways  to  discriminate 
unfairly,  and  then  make  it  criminal  conspiracy  for  them  to  take 
the  only  action  that  will  effectually  prevent  unfair  discrimination. 

It  may  be  said  that,  as  the  Interstate  Commission  now  has 
authority  to  reduce  any  rate,  and  to  prevent  any  advance  in  rates 
that  it  finds  unreasonable,  it  is  unnecessary  for  the  railways  to 
be  allowed  to  act  together  to  stop  or  to  prevent  unfair  discrimina- 
tion ;  that  the  Commission  can  do  this.  But  unfair  discrimination 
consists  in  the  fixing  of  unfair  relations  between  two  or  more 
rates,  and  may  be  due  either  to  the  fact  that  one  rate  is  too  high 
or  that  some  related  rate  is  too  low.  Therefore,  anybody,  in 
order  in  all  cases  fairly  to  correct  discriminations,  must  be  able 
either  to  reduce  a  rate  that  is  too  high  or  raise  a  rate  that  is  too 
low.  But  the  law  confers  on  the  Commission  only  autliority  to 
reduce  rates  and  prevent  advances. 

The  public  very  properly  requires  the  railways  to  give  it  and 


all  its  patrons  a  "square  deal."  Have  not  the  railways  an  equal 
right  to  demand  a  square  deal  from  the  public?  And  can  they 
be  said  to  be  getting  it  as  long  as  the  laws  are  such  that  they 
cannot  obey  part  of  them  without  incurring  the  danger  of  pun- 
ishment for  violating  another  part  of  them  ?  The  Interstate  Com- 
merce Law  and  the  Sherman  Anti-Trust  Law  should  be  so  modi- 
fied as  to  permit  railways  to  enter  into  reasonable  agreements 
regarding  rates.  This  is  allowed  in  every  other  leading  country 
in  the  world.  The  Interstate  Commerce  Act  should  be  further 
amended  so  as  to  authorize  the  Commission,  when  it  finds  a  cer- 
tain adjustment  of  rates  unfairly  discriminatory,  to  correct  it  by 
ordering  either  advances  in  the  lower  or  reductions  in  the  higher 
rates,  according  to  which  may  be  most  fair. 

For  the  last  two  or  three  years  the  public  has  been  giving  less 
attention  than  formerly  to  unfair  discrimination,  and  more  to 
the  queslion  of  the  absolute  amount  of  the  rates  that  ought  to 
be  allowed  to  be  charged.  As  has  already  been  said,  it  is  the 
duty  of  the  railway  not  only  to  make  its  rates  fair  as  between 
different  commodities,  shippers,  and  communities,  but  also  to  make 
them  reasonable — that  is,  not  excessive.  I  believe  the  railways  of 
the  United  States  have  fully  discharged  that  duty.  Traffic  can- 
not grow  rapidly  on  excessive  rates;  and  industry  and  commerce 
cannot  thrive  on  them.  But  traffic  and  industry  and  commerce 
have  increased  in  an  unprecedented  and  unparalleled  degree  on 
the  rates  made  by  American  railways. 

If  further  evidence  be  desired  that  the  rates  of  the  railways 
of  the  United  States  have  been  reasonable,  it  can  be  found  in  a 
comparison  of  them  with  those  of  the  railways  of  other  countries. 
Such  comparisons  are  deceptive  unless  account  be  taken  of  the 
differences  between  transportation  and  industrial  conditions  here 
and  abroad  ;  but,  making  generous  allowance  for  all  these  dif- 
ferences, it  is  conceded  by  every  competent  economist  who  has 
ever  investigated  the  subject  tiiat  the  rates  of  our  railways  arc 
the  lowest  in  the  world. 

A  railway,  however,  has  not  discharged  its  full  public  duly 
even  when  it  has  made  its  rales  both  fair  and  low.  It  is  also  its 
duty  to  treat  its  employes  well,  and  to  give  good  service  to  the 
public.  That  the  railways  of  the  United  Slates,  while  keeping 
tlieir  rates  low,  have  done  well  by  their  employes,  is  amjily 
demonstrated  by  the  statistics  regarding  the  wages  paid  them. 
While   railway   rates   have   remained   almost   stationary,   railway 


8 

wages  have  been  increased  during  the  past  ten  years  about  twenty- 
three  per  cent ;  and  railway  employes  are  today — as,  in  fact,  they 
have  been  for  years — the  highest-paid  workingmen  in  this  or  any 
other  country.  It  is  the  duty  of  railways,  not  only  to  treat  their 
employes  well,  but,  whenever  at  all  possible,  to  reach  settlements 
of  disputed  points  with  them  in  an  amicable  way.  This  duty  was 
not  fully  appreciated  in  past  years,  and  the  consequence  was 
strikes  and  lockouts  which  caused  enormous  trouble  and  loss  to 
the  public.  It  is  a  duty  which  been  fully  appreciated  and  per- 
formed in  later  years,  and,  in  consequence,  there  has  been  no  very 
serious  interruption  to  commerce,  due  to  railway  strikes,  for  a 
long  time. 

As  to  the  railway  service  in  general  in  the  United  States,  it 
has  many  shortcomings;  but  the  managements  of  the  roads  are 
constantly  striving  to  make  it  better ;  and  the  great  improvements 
that  have  been  made  in  it  in  recent  years  ought  to  be  sufficient 
evidence  that  they  will  in  course  of  time  make  it  as  good  as 
anyone  can  reasonably  ask,  if  they  are  allowed  to  charge  rates 
that  are  reasonably  proportionate  to  the  value  of  the  services  they 
render  for  them. 

There  are  many  persons,  however,  who  think  that  the  reason- 
ableness of  rates  should  be  measured  by  some  other  standard  than 
the  value  of  the  services  rendered  for  them.  They  contend  that 
all  a  railway  is  entitled  to  is  a  "fair  return"  on  the  fair  value  of 
its  property ;  that  a  fair  return  is  the  current  rate  of  interest ; 
and  that  if  it  is  earning,  or  in  future  shall  earn,  more  than  this, 
then  its  rates  should  be  reduced.  Is  that  an  equitable  proposition? 
It  is  true  that  the  railway's  service  is  public  and  it  is  therefore 
subject  to  regulation;  but  its  ownership  is  private.  When  private 
capitalists  built  our  railways  they  did  so  with  the  understanding 
that  if  they  gave  good  service  at  fair  and  reasonable  rates  their 
duty  to  the  public  would  be  discharged ;  and  that,  in  return,  the 
public  would  no  more  limit  the  profits  they  derived  from  their 
business  than  it  would  limit  the  profits  derived  by  investors  from 
any  other  business.  The  railways  have  in  the  main  carried  out 
their  part  of  the  bargain.  Now,  obviously,  the  proposition  to  regu- 
late rates  as  to  limit  the  earnings  of  railways  to  a  "fair  return" 
is  a  proposition,  not  merely  to  require  their  rates  to  be  reasonable, 
but  to  limit  their  profits  in  a  way  that  profits  in  no  other  business 
ever  have  been  limited  in  any  other  commercial  undertakings  in 
any  country  on  earth. 


It  is  sometimes  said  that  the  fact  that  railways  exercise  the 
power  of  eminent  domain  gives  the  public  a  special  right  narrowly 
to  limit  their  profits.  But  the  power  of  eminent  domain  can  be 
exercised  only  for  the  public  benefit ;  railways  are  allowed  to 
exercise  it  only  because  otherwise  they  could  not  be  built  at  all, 
and  because  their  construction  and  operation  is  of  benefit  to  the 
public.  On  what  theory  of  equity  can  the  exercise  by  the  rail- 
road of  a  power  which  is  conferred  on  it,  and  which  it  exercises 
for  the  public  good,  be  turned  into  an  argument  for  so  regulating 
it  as  to  make  it  less  profitable  than  concerns  which  do  not  serve 
a  public  use,  but  merely  serve  a  private  purpose? 

One  of  the  greatest  difficulties  in  the  way  of  so  regulating 
rates  as  to  limit  each  railway  to  a  "fair  return"  is  that  railways 
differ  as  widely  as  individual  men.  Some  roads  are  favorably, 
others  unfavorably  located.  Some  managements  have  great,  and 
others  only  moderate  foresight  and  ability,  and  others  almost 
none.  To  limit  the  profits  of  the  favorably  located  and  well- 
managed  railways  to  the  current  rate  of  interest  would  deprive 
them  of  the  rewards  of,  and  the  incentive  to,  good  management. 
As  rates  on  all  competing  roads  must  be  the  same,  it  would  pre- 
vent weaker  roads  from  earning  any  return,  and  bankrupt  them. 
How  is  it  possible  that  anyone  can  believe  that  such  a  policy  would 
be  just  either  to  the  strong  or  to  the  weak  roads? 

If  one  formed  his  opinion  solely  by  following  the  discussions 
of  railway  rates,  he  would  conclude  that  all  the  public  wants  is 
low  rates,  and  that  it  is  willing  that  the  railroads  should  reduce 
the  quality  of  their  service  indefinitely  if  this  be  accompanied  by 
proportionate  reduction  in  rates.  But  this  is  far  from  the  case. 
Railway  men  are  beset  constantly  by  demands  for  reductions  and 
opposition  to  advances  in  rates.  But  they  are  beset  just  as  con- 
stantly by  demands  for  improvements  in  service.  The  public 
cannot  both  eat  its  cake  and  have  it.  It  cannot  at  the  same  time 
get,  and  ought  not  to  ask,  both  lower  rates  and  more  expensive 
and  better  service.  Which  of  the  public's  demands,  then,  ought 
the  railways,  with  the  cooperation  of  the  regulat>ing  authorities, 
chiefly  to  seek  to  meet? 

It  seems  to  me  that  they  ought  mainly,  at  least  for  some 
years  to  come,  to  try  to  meet  the  public's  demand  for  better  serv- 
ice. For  railway  rates  in  this  country  are  the  lowest  in  the  world. 
In  some  respects,  railway  service  here  is  the  best  and  most  effi- 
cient ;  but  everyone  knows  that  there  are  many  improvements  in 


10 

service  which  ought  to  be  made  in  the  interest  of  the  public 
safety,  convenience  and  economic  welfare. 

The  statistics  of  accidents  on  American  railways  are  only  too 
familiar.  I  need  not  repeat  here  the  harrowing  details  to  show 
the  need  of  making  our  transportation  safer.  About  eighty  per- 
cent of  railway  accidents  are  caused  by  mistakes,  or  reckless  vio- 
lations of  the  rules  of  the  companies  by  employes;  but  a  great 
many  are  due  to  defects  and  shortcomings  of  the  physical  plants 
of  the  railways.  The  total  number  of  miles  of  railway  in  the 
United  States  on  June  30,  1909,  was  236,869.  Block-signals  are 
very  useful  in  preventing  accidents,  even  on  roads  where  traffic  is 
comparatively  light,  and  are  absolutely  requisite  to  safe  operation 
where  it  is  heavy.  Yet  a  report  of  the  Block-Signal  and  Train- 
Control  Board  of  the  Interstate  Commerce  Commission  shows 
that  on  January  1.  1910,  the  mileage  operated  by  block-signals 
was  but  65,758  miles,  or  only  twenty-seven  percent  of  the  total, 
and  that  of  this  only  14,237  miles  were  operated  by  automatic 
blocks.  In  the  interest  of  public  safety  there  should  be  a  very 
great  increase  in  the  mileage  of  block-signals. 

In  order  to  make  their  service  safe,  many  roads  will  have  to  do 
an  amount  of  work  for  the  strengthening  of  their  tracks  v/hich 
will  amount  practically  to  reconstruction  of  large  parts  of  them, 
or,  in  the  cases  of  not  a  few  roads,  of  all  of  them.  In  the  course 
of  time  all  grade-crossings  between  railways,  and  between  rail- 
ways and  highways,  ought  to  be  eliminated.  Many  other  costly 
improvements  ought  to  be  made  to  render  transportation  safe  ;  and 
the  roads  are  not  only  willing,  but  anxious  to  make  them  as  fast 
as  their  financial  resources  will  permit,  and  also  to  submit  to  and 
comply  with  all  reasonable  legislation  intended  to  promote  safety. 
It  is  significant  that  while  the  railways  have  contested  in  the 
courts  a  great  deal  of  legislation  regarding  rates,  they  have  never 
tested  the  validity  of  the  original  federal  safety-appliances  acts, 
although  their  constitutionality  has  always  been  doubtful,  but 
have  faithfully  complied  with  them ;  and  that  at  great  expense, 
they  are  now  pursuing  the  same  policy  in  reference  to  the  new 
safety-appliance  act  passed  by  Congress  in  1910.  Railway  man- 
agers are  just  as  anxious  to  make  their  service  safe,  both  for 
their  employes  and  for  passengers,  as  the  public  is  to  have  them 
do  so.  The  main  difference  between  them  and  those  who  criticise 
them  is  that  the  railway  managers  appreciate  more  keenly  the 


11 

expense  that  must  be  incurred,  and  the  difficulties  that  must  be 
overcome,  in  making  transportation  safe. 

Every  railway  manager  in  the  country  has  in  his  files  scores 
of  petitions  for  the  construction  of  new  passenger  stations.  These 
vary  in  importance  and  amounts  of  money  involved  from  the 
request  of  villages  that  their  little  wooden  depots  be  replaced  by 
larger  and  more  pretentious  brick  ones,  to  the  demands  of  cities, 
such  as  Kansas  City,  Washington,  Chicago  and  New  York,  for 
new  passenger  terminals  and  stations  costing  from  $20,000,000 
to  $100,000,000  each.  In  many  cases  the  roads  are  asked  to 
build  not  only  handsome  and  expensive  stations,  but  to  surround 
them  with  beautiful  parks.  The  railways  at  Kansas  City,  as  one 
of  the  conditions  of  the  passage  by  the  city  of  an  ordinance  author- 
izing them  to  build  a  new  union  station,  are  giving  the  public  a 
park  adjacent  to  it  costing  $500,000.  The  appearance  of  the 
railway  station  and  grounds  considerably  influences  the  opinions 
visitors  form  of  a  town  or  city,  and  it  is  perfectly  natural  that  the 
people  should  desire  them  to  be  commodious  and  beautiful.  The 
public  constantly  grows  more  exacting  in  its  demands  for  com- 
fort, and  even  luxury,  on  passenger  trains,  and  for  their  strict 
adherence  to  their  schedules,  so  that  the  traveler  can  tell  with 
unvarying  accuracy  at  what  time  he  will  reach  his  destination. 

Shippers  constantly  ask  more  and  faster  freight  service.  There 
has  been  during  the  last  several  years  a  great  deal  of  complaint 
because  the  roads  have  been  unable  in  the  busiest  parts  of  the 
year  to  handle  promptly  all  of  the  freight  traffic  that  has  been 
offered  them.  In  order  that  they  may  become  able  to  do  this  they 
must  build  numerous  extensions  and  branches,  and  many  miles 
of  second,  third  and  fourth  track.  The  railways  of  the  United 
States  today  are  practically  a  single-track  system ;  of  the  236,869 
miles  of  line,  only  21,000  miles  are  double-tracked.  The  roads 
must  also  greatly  enlarge  their  terminal  facilities  and  provide  hun- 
dreds of  thousands  of  new  cars  and  locomotives. 

The  roads  ought  to  make  all  these  great  improvements.  I>ut 
it  is  perfectly  evident  that  if  they  are  to  be  made,  they  must  be 
paid  for ;  and  that  if  they  are  to  be  paid  for,  the  public  has  a  part 
to  perform — that  of  letting  the  roads  earn  whatever  is  necessary 
to  make  it  practicable  to  pay  for  them.  Now,  while  some  im- 
provements increase  the  earning  capacity  of  a  railway,  others  do 
not.  For  example,  from  the  $500,000  the  roads  are  spending 
on  a  park  at  Kansas  City  they  will  never  derive  a  dollar  of  return. 


12 

They  are  spending  two  or  three  niilHon  dollars  on  the  union  depot 
at  Kansas  City.  A  station  which  would  serve  adequately  all 
purely  transportation  purposes  could  be  built  for  $200,000.  On 
the  difference  between  these  amounts  the  roads  will  receive  no 
return.  Similar  comment  might  be  made  on  all  large  passenger 
stations.  They  are  built  for  the  benefit  of  the  public,  not  for  the 
profit  of  the  railroads.  Elevation  of  tracks  and  separation  of 
grades  increase  to  some  extent  the  efficiency  of  railway  operation, 
but  the  amount  by  which  they  reduce  operating  expenses  is  far 
less  than  the  interest  on  their  cost.  The  amounts  by  which  the 
enlargements  of  terminal  facilities  in  big  cities,  which  must  be 
made  if  the  growing  traffic  is  to  be  properly  handled,  will  increase 
net  earnings,  will  in  many  cases  be  less  than  the  interest  on 
their  cost. 

Improvements  which  increase  earning  capacity  ought  to  be 
capitalized  because  they  afford  the  means  for  paying  interest 
and  dividends.  But  suppose  the  total  investment  of  $2,000,000 
in  a  passenger  station  be  capitalized.  In  twenty-five  years  the 
interest  on  the  investment  at  four  percent  will  have  equaled  the 
original  cost.  At  the  rate  this  country  grows,  the  station  may 
then  be  so  obsolescent  that  it  must  be  replaced  by  another  station, 
costing  perhaps  $6,000,000.  If  this  station  also  be  capitalized, 
the  road  will  thereafter  have  to  pay  interest  on  the  $8,000,000 
it  has  spent  on  the  two  stations,  alhough  it  will  have  but  one 
station. 

Now,  if  a  railway  is  allowed  to  earn  nothing  over  a  "fair 
return,"  it  will  have  no  earnings  to  invest  in  improvements ;  in 
that  event  it  will  have  to  make  from  capital  improvements  that 
do  not  increase  earning  capacity ;  and  that  would  result  in  a 
rapid  and  heavy  increase  of  capitalization.  Would  that  be  fair 
to  posterity?  That  the  English  roads  have  piled  up  a  capital- 
ization of  $314,000  a  mile  is  very  largely  because  they  have  paid 
for  all  improvements  and  betterments  out  of  capital  whether 
they  increased  earning  capacity  or  not.  Unable  to  raise  their 
rates  high  enough  to  earn  a  return  on  this  enormous  capitaliza- 
tion without  imposing  an  intolerable  burden  upon  commerce, 
they  are  now  threatened  with  general  insolvency.  This  is  the 
situation  American  railways  would  be  facing  in  a  comparatively 
few  years  if  the  policy  of  narrowly  limiting  their  net  earnings. 


13 

and  thus  forcing  them  to  make  all  improvements  from  capital, 
were  adopted. 

If  the  public  can  and  shall  regulate  railway  profits,  it  should 
adopt  the  policy  of  letting  the  railways,  or  at  least  the  better- 
managed  ones,  earn  as  much  to  be  spent  on  improvements  as 
they  pay  out  in  dividends  on  a  reasonable  stock  capitalization. 
If,  for  example,  a  road  is  paying  seven  percent  on  its  stock,  it 
ought  to  be  allowed  to  earn  an  equal  additional  amount  with 
which  to  make  improvements.  This  policy,  which  is  the  one 
followed  by  well-managed  industrial  corporations,  would  both 
allow  the  better-managed  roads  to  enjoy  the  benefits  of  their 
good  management,  and  protect  the  weaker  roads  from  reduc- 
tions in  rates  which  would  bankrupt  them.  It  would  also 
strengthen  railway  credit.  That  the  railway  exercises  the  right 
of  eminent  domain  is  held  to  give  the  public  a  special  power  to 
regulate  it;  but  when  it  goes  into  the  money  market  to  raise 
capital,  the  power  of  eminent  domain  gives  it  no  better  credit 
than  that  possessed  by  an  industrial  corporation.  If  it  is  barely 
able  to  earn  its  dividends,  the  investor  will  know  that  if  bad 
times  come  it  will  become  unable  to  meet  its  obligations  to  its 
bond  and  stock  holders,  and  he  will  not  invest  in  its  securities 
except  at  a  discount  proportionate  to  the  risk  taken.  Therefore 
it  is  necessary  for  the  railway  in  good  times  to  earn  more  than 
its  interest  and  reasonable  dividends,  not  only  that  it  may  have 
surplus  earnings  to  invest  in  improvements  that  will  not  increase 
its  earning  capacity,  but  also  that  it  may  be  able  to  get  on  rea- 
sonable terms  the  capital  necessary  to  make  extensions  and  im- 
provements which  will  increase  its  earning  capacity. 

It  may  be  replied  that  if  the  railways  are  allowed  to  earn 
large  profits  in  order  to  have  earnings  to  invest  in  improvements, 
they  will  subsequently  capitalize  all  such  investments,  and  then 
seek  to  make  the  public  pay  a  return  on  them,  and  that,  to  pre- 
vent this,  the  public  should  regulate  their  issuance  of  securities. 
The  past  history  of  our  railways,  which  is  the  only  thing  we 
can  judge  by,  is  against  this  theory.  Some  railways  have  cap- 
italized earnings  invested  in  the  properties,  but  many  have  not. 
The  amount  of  invested  earnings  that  has  not  been  capitalized 
greatly  exceeds  the  amount  that  has  been.  And  it  is  due  largely 
to  this  that  American  railways  are  now  the  most  conservatively 
capitalized   railways   in  the   world.     This   statement   will   be   re- 


14 

ceived  with  incredulity  by  most  people.  The  public  has  lent 
an  all  too  willitii;'  ear  to  the  oft-repcatcd  mis-statement  that  our 
railways  are  overcapitalized.  It  is  true  that  some  of  them  are, 
but  who  can  believe  that  they  are  as  a  whole  after  reading  the 
following  figures  regarding  the  capitalization  per  mile  of  the 
railways  of  our  own  and  other  countries :  United  States,  $59,- 
259:  Argentina,  $59,930;  New  South  Wales,  $63,999;  Canada, 
$66,752;  Switzerland,  $109,000;  Germany,  $109,788;  France, 
$139,290;  United  Kingdom,  $275,040;  England  alone,  $314,000? 

If  the  public,  in  order  to  enable  the  roads  to  make  needed 
improvements  in  their  facilities,  shall  permit  them  to  earn  more 
than  enough  to  pay  substantial  dividends,  the  roads,  no  doubt, 
will  be  under  a  moral  obligation  properly  to  invest  the  surplus 
earnings  in  the  properties  and  to  abstain  from  capitalizing  them. 
It  has  been  proposed  to  subject  the  issuance  of  railway  securities 
to  regulation  by  the  Interstate  Commerce  Commission ;  and  un- 
doubtedly, if  the  roads  did  not  deal  fairly  with  the  public  in 
regard  to  this  matter,  this  would  strongly  reinforce  the  argu- 
ment for  such  regulation. 

There  are  many  other  points  regarding  the  relations  of  the 
railways  and  the  people  on  which  I  should  like  to  touch  if  space 
permitted.  The  one  point,  however,  that  I  am  most  anxious 
to  drive  home  is  the  one  that  comes  out  most  prominently  in  the 
intelligent  discussion  of  every  phase  of  the  railway  question — 
namely,  that  the  duties  of  the  railways  and  the  people,  whether 
in  regard  to  rates,  or  service,  or  capitalization,  or  any  other 
feature  of  railway  policy,  are  equal  and  reciprocal.  This  must 
always  be  true  while  the  service  of  the  railways  is  public  and 
their  ownership  is  private.  The  public,  on  the  one  hand,  and 
the  private  owners  of  the  railways,  on  the  other  hand,  have 
exactly  equal  rights  to  demand  that  each  shall  give  the  other  a 
"square  deal."  When  either  asks  much,  it  must,  for  equitable 
as  well  as  economic  and  legal  reasons,  be  prepared  and  willing 
to  give  much  in  return. 

Up  to  a  comparatively  few  years  ago,  the  public  probably 
did  its  duty  by  the  railways  better  than  the  railways  did  their 
duty  by  the  public.  Broadly  speaking,  the  management  of  our 
railways  was  good ;  but  some  deplorable  abuses  characterized 
railway  management.  The  public  was  amply  justified  in  grow- 
ing incensed  at  these  conditions,  and  taking  vigorous  measures 


15 

to  remedy  them.  But  the  course  the  pubHc  actually  has  adopted 
has  not  been  fair  to  the  railways,  or  to  itself.  It  has  not  been 
content  merely  to  pass  and  enforce  laws  for  the  suppression  of 
the  real  evils  in  railway  management.  It  allowed  itself  to  be 
hurried  into  a  fit  of  passion  against  the  roads ;  and  this  has  been 
succeeded  by  a  prejudiced  mental  attitude  toward  them.  The 
result  has  been  that  it  has  given  willing  ear  to  innumerable 
glaring  misrepresentations  of  them,  and  has  passed  numerous 
laws  which  are  extremely  unjust  and  injurious. 

Take,  for  example,  its  attitude  toward  secret  rebating.  This 
was  the  most  pervading  and  pernicious  abuse  that  ever  devel- 
oped in  the  railway  business  in  this  country,  and  the  public  was 
justified  in  adopting  measures  for  its  suppression.  But  the  pub- 
lic has  been  unfair  in  that  it  has  habitually  refused  to  give  due 
weight  to  the  fact  that  no  rebate  was  ever  given  which  was 
not  received  by  some  one ;  and  that  the  recipients  were  just  as 
guilty  as  the  givers ;  or  to  the  further  fact  that  the  railways 
tried  repeatedly  to  stop  rebating,  and  did  more  than  any  one 
else  to  get  passed  the  Elkins  Act  of  1903,  which  did  more  to 
suppress  that  evil  practice  than  any  other  piece  of  legislation. 

Again,  the  railways  have  been  bitterly  denounced  by  the 
press,  public  men  and  the  people  for  having  at  times  used  cor- 
rupt means  to  prevent  the  passage  of  laws  which  their  managers 
thought  would  hurt  them.  The  use  of  such  means  was  ethically 
indefensible ;  but  the  people  were  largely  to  blame  for  it.  The 
people  elected  corrupt  men  to  the  legislatures,  who  introduced 
measures  whose  passage  would  have  been  injurious  to  the  roads, 
and  the  purpose  of  whose  introduction  was  to  blackmail  them. 
No  doubt  the  roads  should  have  submitted  to  the  passage  of 
these  unfair  measures  instead  of  submitting  to  being  black- 
mailed. But  can  the  people  who  elected  these  men  to  office 
fairly  lay  all  the  blame  on  the  railways  for  the  corrupt  bargains 
which  their  chosen  representatives  struck  with  the  representa- 
tives of  the  railways?  The  railways  all  over  the  country  are 
now  trying  very  hard  to  avoid  entirely  the  use  of  improper 
measures  to  influence  legislation.  They  have  a  right  to  ask  that 
the  public  shall  meet  them  halfway  in  this  matter.  But  the 
blackmailing  lawmaker  still  regularly  turns  up  in  many  of  our 
city  councils  and  state  legislatures. 

Once  more,  some  newspapers  and  public  men  have  purveyed 


16 

for  public  consumption,  and  the  public  has  accepted,  the  most 
tropical  misrepresentations  of  railway  capitalization.  For  ex- 
ample, certain  public  men  have  repeatedly  asserted  that  the  rail- 
ways of  this  country  are  overcapitalized  to  the  extent  of  $8,0(X),- 
000,000.  Now,  there  is  not  one  scintilla  of  evidence  to  support 
that  statement.  Every  fair  valuation  of  railways  which  has  been 
made  by  commission  or  court  has  shown  that  most  of  the  rail- 
ways valued  were  capitalized  for  less  than  it  would  cost  to 
reproduce  their  physical  properties.  Only  a  short  time  ago  I 
saw  the  statement  in  the  Washington  correspondence  of  one  of 
our  leading  newspapers  that  our  railways  are  capitalized  for  an 
average  of  $235,000  a  mile.  The  writer  of  that  statement,  and 
the  readers  of  it.  could  have  found  by  investigation  that  there 
is  not  a  single  railway  in  this  country  capitalized  for  as  much 
as  the  amount  stated,  and  that  the  average  capitalization  of  our 
railways,  as  reported  by  the  Interstate  Commerce  Commission, 
was,  on  June  30,  1909,  as  already  stated,  but  $59,259  per  mile. 
But  the  public  has  not  investigated  misstatements  such  as  this, 
which  are  quite  worthy  of  Baron  Munchausen.  It  has  accepted 
them  as  the  true  gospel,  and  it  is  mainly  owing  to  this  that  there 
is  today  in  progress  a  widespread  agitation  for  a  physical  valua- 
tion of  railways  which  is  being  conducted  on  the  utterly  erroneous 
theory  that  the  railways  are  charging  excessive  rates  to  pay  a 
return  on  excessive  capitalization,  and  that  for  the  protection 
of  the  public  their  value  must  be  ascertained  and  used  in  future 
as  a  basis  for  the  regulation  of  rates. 

Meanwhile,  the  attitude  of  the  railway  managements  has 
been  changing.  The  duty  of  the  railways  to  the  public  is  now 
more  clearly  recognized  by  their  managers,  more  frankly  con- 
ceded, and  more  fully  and  faithfully  performed,  than  it  ever 
was  before.  In  consequence  of  these  changes,  I  believe  that  it 
can  truthfully  be  said  that,  whereas  up  to  a  few  years  ago  the 
public  did  its  duty  to  the  railways  better  than  the  railways  did 
theirs  to  the  public,  the  reverse  is  now  the  fact;  and  that  the 
railways  have  a  right  to  complain  that  they  are  now  doing  their 
duty  to  the  public  much  better  than  the  public  is  doing  its  duty 
to  them. 

To  remedy  the  present  unsatisfactory  condition  it  is  needful, 
on  the  one  hand,  that  railway  managers  as  a  class  shall  clearly 
see   and    frankly   concede   that   they   are   quasi-public   servants, 


17 

owing  a  different  and  a  higher  duty  to  the  public  than  ahnost 
any  other  business  men,  and  act  accordingly.  They  must  also 
recognize  that  their  duty  does  not  consist  merely  in  making 
reasonable  rates,  giving  good  service,  and  honestly  managing 
the  properties  entrusted  to  their  care  for  the  benefit  both  of  the 
owners  and  the  public,  for  the  public  has  a  right  to  interest  itself 
in  all  the  various  questions  about  railway  policy  that  arise ;  many 
of  these  questions  are  very  complicated ;  and  it  is  a  duty  of  rail- 
way men,  which  usually  has  been  rather  poorly  done,  to  discuss 
these  questions  with  the  public  fully  and  candidly,  that  the  public 
may  know  the  imperative  practical  conditions  which  require  the 
railway  business  to  be  managed  on  much  the  same  commercial 
principles  as  other  businesses,  and  why  it  is  to  the  interest  of 
the  public  that  it  shall  be  so  conducted. 

On  the  other  hand,  it  is  the  duty  of  the  public  to  disabuse 
its  mind  of  much  of  the  misinformation  and  prejudice  about 
railways  with  which  it  has  been  filled  by  the  anti-railway  agitation 
of  the  last  five  or  six  years.  As  it  is  the  duty  of  railway  man- 
agers to  remember  and  to  act  always  in  accordance  with  the  fact 
that  the  railway  is  a  public  service  corporation,  so  it  is  the  cor- 
relative duty  of  the  public  always  to  remember  and  act  in  ac- 
cordance with  the  fact  that  the  railway's  ownership  is  private ; 
that  the  private  persons  who  own  it  have  the  same  right  to  de- 
mand protection  in  the  enjoyment  of  their  property  rights  as 
the  owners  of  any  other  private  property ;  and  that  unjust  at- 
tacks on  their  rights  of  property  are  just  as  immoral  as  attacks 
on  the  property  rights  of  the  manufacturer,  the  merchant,  or 
the  farmer,  and  will,  in  the  long  run,  react  just  as  disastrously 
on  the  welfare  of  the  country.  The  people  can  make  the  owner- 
ship as  well  as  the  service  of  our  railways  public  if  they  wish  to ; 
and  as  long  as  they  do  not  do  so  they  cannot  fairly  treat  them 
as  if  they  were  public  property. 

It  is  perfectly  feasible  to  establish  proper  ethical  relations 
between  the  railway  and  the  people;  but  I  know  of  no  way  in 
which  this  can  be  done  except  by  following  substantially  that 
noble  rule,  whose  influence  is  all  too  seldom  felt  in  modern 
politics  and  business,  of  each  doing  by  the  other  as  he  would 
be  done  by. 


Shall  Railway  Rates  be  Raised? 

By  WALKER  D.  HINES 

In  controversies  respecting  railway  rates  attention  is  gen- 
erally centered  upon  the  active  contestants,  who  are  usually  the 
merchants  and  shippers  and  the  railway  companies.  But  the 
public  interest  in  the  conservation  and  development  of  the  coun- 
try's transportation  service  reaches  far  beyond  these  classes  of 
society.  The  interests  of  railway  labor,  of  the  investors  in  rail- 
way securities,  of  the  producers  of  railway  supplies  and  mate- 
rials, of  those  concerned  in  the  opening  up  of  the  undeveloped 
regions  of  the  country,  and,  above  all  else,  the  interests  of  all 
the  people  in  the  extension  of  railway  transportation  and  in  the 
increased  convenience,  efficiency  and  safety  of  that  transporta- 
tion, are  vitally  involved. 

These  general  interests  of  the  public  require  that  railway 
companies  should  be  given  an  opportunity  not  merely  to  earn 
interest  and  dividends  with  respect  to  their  existing  property, 
but  also  to  earn  an  adequate  surplus  to  serve  as  a  basis  for  pro- 
viding the  money  needed  for  the  continual  improvement  and  ex- 
pansion of  railway  properties  so  as  to  keep  up  with  the  progress 
of  civilization,  the  development  of  new  territory,  and  the  growth 
of  population  and  business.  This  article  supplies  a  concrete 
illustration  of  this  proposition,  through  the  presentation  of  a  brief 
history  of  the  actual  financing  of  an  important  railway  system. 

The  Atchison,  Topeka  &  Santa  Fe  Railway  system  is  one 
of  the  great  railway  properties  of  the  country.  It  has  a  mileage 
of  about  ten  thousand  miles,  and  the  va.st  area  of  country  which 
it  serves  is  shown  in  graphic  form  by  the  accompanying  map. 
Some  of  its  important  terminals  arc  Chicago,  Kansas  City,  Gal- 
veston, Denver,  El  Paso,  Los  Angeles  and  San  Francisco.  Its 
main  lines  and  branches  cross  or  penetrate  nine  .States  and  Ter- 
ritories— Illinois,  Missouri,  Kansas,  Oklahoma,  Texas,  Colorado, 
New  Mexico,  Arizona  and  California,  and  also  reach  one  or  more 
places  in  Iowa,  Nebraska  and  Nevada. 

19 


20 

The  original  Santa  Fe  Railroad  was  organized  and  began 
business  about  1875.  It  and  its  competitors  were,  however,  ex- 
tended too  rapidly  in  an  undeveloped  country  which  could  not 
supply  business  enough  to  go  around,  and  the  result  was  that 
in  1895.  at  a  period  of  business  depression  which  prevailed 
throughout  the  country,  and  which  caused  a  very  large  number 
of  railway  receiverships,  the  company,  after  many  ups  and  downs, 
became  hopelessly  bankrupt.  The  property  was  reorganized, 
and  the  present  Atchison,  Topeka  &  Santa  Fe  Railway  Com- 
pany began  business  in  January,  1896.  Roughly  speaking,  it 
paid  for  the  property  about  $377,000,000  in  stock  and  bonds. 
Since  that  purchase  it  has  spent  in  the  development  and  im- 
provement of  the  property  not  less  than  $150,000,000  raised  by 
the  sale  of  additional  bonds,  and  fully  $50,000,000  more  which 
it  has  taken  out  of  surplus  earnings,  a  sum  greater  than  the  total 
amount  of  dividends  paid  upon  the  common  stock  during  the 
entire  life  of  the  company,  such  dividends  aggregating  about 
$48,000,000.  That  the  stock  and  bond  holders  have  not  re- 
ceived an  unreasonable  share  of  the  earnings  is  indicated  by  the 
fact  that  the  bond  interest  and  stock  dividends  actually  paid  on 
the  total  outstanding  securities  have  averaged  for  the  last  four- 
teen and  a  half  years  3}i  percent  per  annum. 

The  reader  will  at  once  ask  why  the  company  has  had  to 
spend  $200,000,000  upon  its  property  in  fourteen  and  a  half 
years,  in  addition  to  all  the  heavy  running  expenses  of  operating 
the  property  and  keeping  it  in  repair,  and  whether  similar  ex- 
penditures are  to  be  expected  in  the  future.    Here  is  the  answer : 

The  expenditures  have  been  on  account  of  additional  and 
improved  equipment  and  other  additions  and  betterments,  such 
as  second  track,  improved  track  and  roadway,  improved  ter- 
minal facilities,  and  in  part  on  account  of  additional  mileage. 
The  expenditures  on  account  of  additional  mileage  have  aver- 
aged for  the  fourteen  and  a  half  years  about  $4,500,000  per 
year,  but  for  the  year  ending  June  30,  1910,  were  nearly  $9,000,- 
000.  The  necessity  for  the  construction  of  many  additional  lines 
is  already  apparent,  and  more  and  more  of  such  work  will  be- 
come essential  as  the  country  develops.  The  Santa  Fe  system 
serves  a  largely  undeveloped  country  whose  complete  develop- 
ment will  demand  that  thousands  of  miles  of  additional  rail- 
ways shall  be  constructed  by  the  company. 


21 

But  by  far  the  greater  part  of  the  capital  expended  has  been 
for  additional  and  improved  equipment  and  for  other  additions 
and  betterments  to  lines  already  in  the  system.  The  progressive 
way  in  which  these  expenditures  tend  to  increase  is  strikingly 
shown  by  the  following  statement  by  years  of  the  combined 
expenditures  for  equipment  and  other  additions  and  betterments 
to  lines  already  in  the  system : 

Year  ending  June  30. 

1896  (6  months) $       396,615 

1897  1,301,308 

1898  2,848,710 

1899  4,292,165 

1900  4,452,713 

1901  3,581,521 

1902   11,030,816 

1903   7,835,408 

1904   8,109,373 

1905   4,312,065 

1906   16,402,112 

1907   18,168,100 

1908   21,457,543 

1909   6,241,127 

1910   19,632,586 

$130,062,262 
But  for  the  unfavorable  business  conditions  in  the  year  end- 
ing June  30,  1909,  these  expenditures  for  that  year  would  have 
kept  up  with  the  rate  of  increase  shown  for  the  preceding  three 
years.  Likewise  the  expenditures  for  the  year  ending  June  30, 
1910,  would  have  been  substantially  larger  but  for  the  recur- 
rence of  unfavorable  business  conditions. 

For  the  entire  fourteen  and  a  half  years  the  actual  expendi- 
tures for  betterments  (including  equipment)  have  averaged  a 
little  less  than  nine  million  dollars  per  year,  while  for  the  last 
five  years  they  have  averaged  over  sixteen  million  dollars  per 
year,  and  but  for  the  unfavorable  conditions  in  1909  and  1910 
would  probably  have  averaged,  for  the  five  years,  about  twenty 
million  dollars  per  year. 

It  is  the  opinion  of  the  officers  of  the  comj)any  that  in  thr 
next  few  years  these  expenditures  for  betterments  should  con- 
tinue to  average  from  twenty  million  to  twenty-five  million  dol- 
lars per  year,  and  perhaps  more,  in  order  to  meet  the  never- 
ceasing   requirements    for   additional    and    improved    equipment. 


22 

and  for  iniuinierable  improvements  of  the  existing  lines.  In  ad- 
dition, there  should  be  provided  funds  for  construction  of  new 
mileage  to  the  extent  of  five  to  ten  million  dollars  per  year. 

It  is  not  practicable  to  forecast  the  more  remote  future,  ex- 
cep  to  say  that  there  is  every  reason  to  believe  that  all  such 
expenditures  will  increase  continually  and  progressively.  As 
population  and  business  increase  and  civilization  advances,  there 
is  an  ever-increasing  necessity  for  the  continual  remaking  of  the 
existing  railways  and  their  equipment,  and  for  the  construction 
of  additional  mileage.  If  the  Santa  Fe  and  other  railways  had 
been  so  managed  as  to  be  merely  just  as  good  today  as  they 
were  fifteen  years  ago,  with  the  same  small  locomotives  and 
cars,  light  rail,  poor  roadbed,  heavy  grades,  absence  of  conven- 
iences and  safety  appliances,  it  is  clear  that  the  country's  trans- 
portation facilities  would  be  hopelessly  obsolete  and  out  of  keep- 
ing with  the  civilization  of  today.  Such  expenditures  as  those 
which  the  Santa  Fe  has  had  to  make  for  equipment  and  other 
additions  and  betterments  have  been  necessary  in  order  to  avoid 
such  obsolescence  and  to  keep  step  wath  the  spirit  of  progress, 
and  similar  expenditures  in  increasing  amounts  will  be  needed 
more  and  more  in  the  future. 

In  view  of  this  showing  of  what  has  been  done  and  of  what 
will  have  to  be  done  by  the  Santa  Fe,  it  must  be  apparent  that 
the  raising  of  enormous  amounts  of  money  for  improvements 
and  extensions  is  a  prime  function  of  the  company,  and  one  of 
the  very  highest  importance  to  the  public.  I  have  already  shown 
that  the  Santa  Fe,  in  order  to  protect  its  property  from  depre- 
ciation or  obsolescence,  and  to  extend  and  improve  it  to  meet 
the  demands  of  the  public,  ought  to  raise  and  spend  about  $30,- 
000,000  a  year  in  addition  to  its  current  operating  expenses. 
Before  discussing  the  ways  and  means  of  raising  these  millions 
let  me  present  a  few  figures  which,  even  without  comment,  may 
give  some  impression  of  the  problems  of  finance  involved  in 
managing  a  great  railway  system.  Last  year  the  Santa  Fe  spent 
for  additions  and  betterments  to  its  existing  lines  over  nineteen 
million  dollars.  Of  this,  over  five  millions  went  for  freight  cars, 
two  millions  for  passenger  cars,  one  million  for  locomotives, 
nearly  three  millions  for  additional  main  tracks  (so  as  to  provide 
double  tracks),  over  a  million  for  reducing  grades,  and  nearly 
two  millions  for  new  buildings  and  shops. 


23 

There  are  only  four  ways  by  which  the  money  for  these  ex- 
penditures can  be  raised.  They  are,  first,  by  taking-  it  out  of 
the  profits  of  the  business ;  second,  by  selling  new  stock ;  third, 
by  borrowing  on  bonds  secured  by  mortgage  on  the  property ; 
or,  fourth,  by  borrowing  on  promissory  notes  or  bonds  not  se- 
cured by  mortgage.  It  is  obvious  that  none  of  these  methods 
can  be  followed  in  a  business  which  is  not  profitable  or  cannot 
show  with  reasonable  surety  that  it  will  be  profitable  in  the  near 
future.  Surplus  earnings  cannot  be  drawn  upon  unless  there 
are  surplus  earnings ;  nobody  will  buy  stock  unless  it  can  be  ex- 
pected to  pay  reasonable  dividends ;  property  which  is  already 
fully  covered  by  mortgage  cannot  be  mortgaged  anew ;  and  a 
borrower  whose  credit  is  not  good  (that  is,  who  is  not  doing 
a  profitable  business)  cannot  borrow  money  on  unsecured  bonds 
or  promissory  notes.  Every  man  who  reads  this  will  understand 
how  these  principles  apply  to  his  own  private  business.  At  the 
present  time,  generally  speaking,  the  property  of  the  Santa  Fe 
is  covered  by  first  and  second  mortgages  for  nearly  two  hundred 
and  fifty  million  dollars,  and  therefore  is  not  available  as  se- 
curity for  additional  mortgage  bonds.  That  source  of  raising  the 
twenty-five  or  thirty  millions  of  necessary  new  capital  annually 
is  therefore  virtually  exhausted.  The  money,  then  must  be  raised 
by  selling  stock  or  by  selling  unsecured  bonds  or  notes,  or  by 
drawing  upon  surplus  earnings  accumulated  after  interest  on 
the  bonds  and  reasonable  dividends  have  been  paid. 

Fortunately  the  success  and  conservatism  of  the  company 
created  sufficient  confidence  in  the  investment  value  of  its  com- 
mon stock  to  make  it  practicable  for  the  company  in  the  five 
years  ending  June  30,  1910,  to  raise  about  one  hundred  and  fifteen 
million  dollars  by  the  sale  of  bonds  convertible  into  stock.  These 
bonds  are  not  secured  by  mortgage  or  otherwise,  and  the  com- 
pany has  been  able  to  sell  them  on  favorable  terms  solely  be- 
cause the  bonds  conferred  the  privilege  upon  the  bondholder  to 
convert  them  at  his  option  into  an  equal  amount  of  common  stock, 
and  the  investing  public  regarded  the  common  stock  as  a  suffi- 
ciently attractive  investment  to  make  this  privilege  valuable. 
Of  the  convertible  bonds  so  sold  to  June  30,  1910,  nearly  ninety 
million  dollars  were  long-term  four-percent  bonds,  and  a  little 
over  twenty-five  million  dollars  were  ten-year  five-percent  bonds, 
and  on  an  average  they  were  all  disposed  of  practically  at  par. 


24 

Thus  it  appears  that  up  to  the  present  time  the  company 
would  have  failed  very  largely  in  the  performance  of  the  func- 
tion of  raising  the  needed  funds  to  improve  and  extend  its  sys- 
tem but  for  its  ability  to  raise  the  larger  part  of  those  funds 
upon  the  strength  of  the  attractiveness  of  its  common  stock.  It 
is  clear  that  its  common  stock  would  not  have  been  attractive 
if  the  company  had  not  been  able  to  pay  a  fair  dividend  upon  it 
(never,  however,  in  excess  of  six  percent). 

But  it  must  be  remembered  that,  while  the  company  has  spent 
on  the  property  not  less  than  $150,000,000  of  borrowed  money, 
it  has  also  spent  upon  the  property  over  $50,000,000  of  surplus 
earnings.  It  is  clear  that  the  ability  of  the  company  to  borrow 
the  $150,000,000  was  vastly  promoted  by,  and  indeed  dependent 
upon,  the  fact  that  it  expended  fully  one-third  as  much  out  of 
earnings.  If  the  company's  income  had  been  so  reduced  that  it 
could  not,  after  paying  interest  and  dividends,  expend  this  fifty 
millions  out  of  earnings,  the  company  would  have  had  to  bor- 
row two  hundred  million  dollars,  instead  of  one  hundred  and 
fifty  million  dollars,  in  order  to  make  these  necessary  improve- 
ments and  extensions.  If  this  had  been  practicable  at  all,  it 
would  have  increased  the  permanent  fixed  charges  upon  the 
property  by  not  less  than  two  and  one-half  millions  per  year ; 
probably  the  increase  in  fixed  charges  would  have  been  much 
greater,  because  the  increased  borrowing  would  have  made  the 
securities  less  attractive  and  would  have  necessitated  the  pay- 
ment of  higher  interest  rates.  However,  there  is  a  wide  gulf 
between  borrowing  one  hundred  and  fifty  million  dollars  when 
the  property  has  been  strengthened  by  the  expenditure  upon  it 
of  fifty  million  dollars  of  surplus  earnings,  and  the  borrowing  of 
two  hundred  million  dollars  without  any  surplus  put  back  into 
the  property.  The  former  has  been  practicable ;  the  latter  would 
not  have  been  practicable. 

The  theory  that  improvements  and  extensions  should  be  made 
only  by  borrowing  new  capital,  and  that  the  return  on  the  entire 
amount  of  such  expenditures  will  be  assured  by  the  increased 
receipts  from  such  improvements  and  extensions,  fails  to  work 
in  practice.  This  theory  makes  no  allowance  for  the  payment 
of  a  return  on  the  new  capital  pending  its  becoming  productive 
(sometimes  a  period  of  several  years),  and  makes  no  allowance 
for  such  considerations  as  that  many  improvements  which  are 


25 

necessary  and  distinctly  in  the  public  interest  (such  as  improved 
station  buildings)  will  never  yield  any  pecuniary  return  at  all; 
that  many  others  (such  as  increased  safety  appliances,  cost  of 
elevation  of  tracks,  etc.)  will  never  yield  any  return  commensu- 
rate with  their  cost ;  and  that  many  improvements  and  exten- 
sions, though  expected  to  be  profitable,  will  turn  out  to  be  un- 
profitable ;  and  this  theory  makes  no  allowance  for  the  supremely 
important  fact  that  investors  are  not  friendly  to  enterprises 
which  issue  new  securities  for  all  expenditures  not  chargeable 
to  current  operating  costs — that  is  to  say,  which  do  not  accumu- 
late savings  and  invest  them  in  the  property. 

The  increasing  demands  of  the  public  are  responsible  for  a 
great  many  expenditures  which  do  not  appreciably  increase  the 
profits  of  the  railways.  For  example,  there  is  constant  pres- 
sure for  improved  facilities  of  all  sorts  for  passenger  travel. 
The  public  demands  better  cars,  better  lighted  cars,  and  more 
spacious  stations.  The  railway  companies  at  Kansas  City  have 
recently  found  it  necessary,  in  order  to  handle  the  increased 
business  through  Kansas  City,  to  rearrange  and  extend  their 
terminals,  both  freight  and  passenger,  at  that  place,  and  have 
been  compelled  on  account  of  local  public  sentiment  to  provide 
for  the  erection  of  a  magnificent  passenger  station,  much  of  the 
expense  in  connection  therewith  being  simply  to  gratify  local 
pride,  and  tending  in  no  way  to  increase  the  profitableness  of  the 
terminals.  This  is  merely  one  illustration  of  a  general  demand 
throughout  the  country  for  a  higher  grade  of  passenger  facilities, 
which  will  not  increase  the  profitableness  of  the  passenger  busi- 
ness. 

Likewise,  there  is  a  steadily  increasing  demand  for  improve- 
ments which  will  promote  the  safety  of  the  general  public  and 
of  employes.  The  city  of  Wichita,  Kan.,  is  insisting  that  the 
Santa  Fe  elevate  its  tracks,  which  at  present  are  upon  the  sur- 
face of  a  city  street.  While  this  is  a  very  proper  demand,  it  is 
evident  that  the  elevated  tracks  will  be  no  more  profitable  than 
the  surface  tracks,  and,  on  the  contrary,  the  increased  expense 
of  maintaining  the  elevated  structure  will  probably  more  than 
ofifset  any  pecuniary  advantages  which  may  result  from  the 
change.  Many  costly  improvements  to  rolling  stock  are  neces- 
sitated by  the  public  demand  for  increased  safety  appliances. 
There  is  no  hope,  however,  of  realizing  specific  pecuniary  benefit 


26 

from  these  expenditures,  even  though  they  may  reduce  the  num- 
ber of  personal  injuries,  because  the  constantly  growing  ideas 
of  juries  as  to  the  amount  of  damages  which  ought  to  be  awarded 
for  such  personal  injuries  as  will  still  occur  will  more  than  ofifset 
the  decrease  in  the  number  of  such  injuries. 

In  general,  progressive  railway  managers  concede  the  entire 
propriety  of  these  additional  expenditures  for  the  protection  of 
human  life,  the  promotion  of  comfort,  and  the  gratification  of 
the  aesthetic  tastes ;  but  all  these  things  cost  money,  and  the  in- 
vestment will  not  produce  additional  profits.  Hence  the  desira- 
bility of  meeting  these  demands  by  expenditures  out  of  earn- 
ings, rather  than  by  obtaining  the  money  through  issue  of  new 
stock  or  bonds,  the  dividends  or  interest  on  which  would  not  be 
earned  by  the  improvements. 

The  notion  is  frequently  suggested  that  when  earnings  are 
expended  upon  betterments  and  improvements  the  result  is  that 
money  is  unjustly  taken  from  the  shipping  public  and  converted 
to  the  benefit  of  the  stockholders  of  the  railway  companies.  This 
article  is  not  designed  to  discuss  the  numerous  freight-rate  falla- 
cies which  underlie  such  a  contention.  It  is  sufficient  for  present 
purposes  to  point  out  that  the  stock  of  the  Santa  Fe  Company 
has  never  been  increased  on  account  of  surplus  earnings  ex- 
pended upon  the  property,  and  that  there  is  no  plan  for  increas- 
ing the  stock  on  any  such  account. 

It  has  been  exceedingly  fortunate  for  the  country  served 
by  the  Santa  Fe  that  it  has  been  able  to  earn  enough  to  pay 
fair  dividends  on  its  stock  and  to  put  back  large  amounts  of 
earnings  into  the  property,  thereby  being  enabled  to  borrow  on 
the  basis  of  its  stock  the  enormous  additional  amounts  needed  for 
still  further  improvements  and  extensions  of  its  public  service. 
The  comfort  and  safety  of  the  traveling  public  have  been  en- 
hanced ;  the  business  and  the  convenience  of  the  shipping  public 
have  been  greatly  promoted ;  new  territory  has  obtained  much- 
needed  railway  mileage ;  the  demand  for  railway  labor  has  been 
greatly  increased,  and  the  consumption  of  railway  material  and 
supplies  has  been  vastly  enlarged.  All  this  has  constituted  an 
important  factor  in  the  civilization  and  in  the  prosperity  of  the 
country.  This  factor  would  have  been  most  seriously  impaired 
by  any  serious  diminution  in  the  Santa  Fe  earnings. 

It  has   already  been   pointed   out   that   the   expenditures   for 


27 

improvement  and  extension  of  the  property  will  continue  to 
increase  very  rapidly.  It  is  evident  that  the  portion  derived  from 
surplus  earnings  for  such  expenditures  ought  to  increase  cor- 
respondingly, but  it  is  apparent  that  increased  cost  of  operation, 
coupled  with  the  increased  burden  of  paying  a  return  upon  a  new 
capital  borrowed  and  put  into  the  property,  tends  to  decrease 
very  seriously  the  amount  which  the  company  can  spend  upon 
the  property  out  of  earnings. 

The  theorist  may  urge  that  increased  business  will  make  up 
for  increased  expenses,  but  the  fact  is  that,  after  meeting  in- 
creased operating  expenses  due  to  higher  wages  and  prices  and 
to  increased  expense  of  public  regulation,  after  meeting  increased 
taxes,  and  after  meeting  the  interest  and  dividend  requirements, 
the  surplus  earnings  available  for  expenditure  upon  the  prop- 
erty threaten  to  diminish  very  rapidly. 

The  amounts  of  surplus  earnings  so  available  have  been  about 

as  follows  for  the  past  five  years: 

For  the  year 
ending  June  30. 

1906   $4,500,000 

1907   9,600,000 

1908   340,000 

1909   9,000,000 

1910   4,000,000 

The  year  ending  June  30,  1910,  represented  the  largest  busi- 
ness the  company  ever  did,  and  yet  its  surplus  earnings  for 
expenditure  on  the  property  were  less  than  one-half  what  they 
ought  to  be.  It  is  anticipated  that  there  will  be  very  large  in- 
creases in  operating  expenses  for  the  year  1910,  on  account  of 
increased  wages  of  employes,  and  there  will  probably  be  a  still 
further  increase  in  taxes,  so  the  outlook  is  that  the  company  will 
have  even  less  to  put  back  into  the  property  for  the  current  year. 

For  the  purpose  of  maintaining  the  company's  credit  so  as 
to  enable  it  to  borrow  the  large  additional  amounts  which  it 
must  borrow,  the  condition  now  existing  cannot  be  met  by  re- 
ducing dividends  on  the  common  stock  so  as  to  afTord  sufficient 
surplus  earnings  to  spend  upon  the  property.  Any  such  course 
would  have  the  effect  of  rendering  the  common  stock  so  unat- 
tractive as  an  investment  as  to  impair  the  comi)any's  credit  and 
prevent  its  borrowing  the  new  capital  that  it  needs.  Nor  can  the 
condition  be  met  by  reducing  capital  expenditures  out  of  sur- 
plus earnings,  for  such  a  step  merely  postpones  needed  improve- 


28 

ments,  thereby  increasing  the  amounts  which  in  the  future  must 
be  expended  out  of  earnings  or  out  of  borrowed  money. 

In  brief,  in  order  to  fulfill  the  function  of  improvement  and 
extension,  the  company  must  pay  a  sufficient  dividend  on  the 
common  stock  to  make  that  stock  attractive  as  an  investment, 
and  must  in  addition  have  a  sufficient  surplus  for  expenditures 
upon  the  property.  These  two  essential  conditions  to  the  com- 
pany's credit  cannot  be  adequately  met  except  by  a  substantial 
increase  in  the  company's  net  revenue. 

It  must  be  emphasized  that  the  grave  need  of  additional  rev- 
enue is  not  for  the  purpose  of  paying  the  stochkolders  a  greater 
return  than  six  percent.  The  additional  earnings  are  needed 
to  preserve  and  continue  the  company's  ability  to  raise  the  nec- 
essary funds  to  improve  and  extend  its  property  in  the  public 
interest.  Such  ability  depends  on  the  power  to  pay  a  dividend, 
say,  of  six  percent  on  the  common  stock  already  outstanding 
and  on  the  additional  stock  that  must  from  time  to  time  be 
issued  in  exchange  for  convertible  bonds  or  issued  directly  for 
new  money,  and  also  on  the  power  to  expend  upon  the  property 
out  of  earnings  a  due  proportion,  say  one-fourth  or  one-third, 
of  the  total  expenditures  of  new  capital  which  conditions  re- 
quire the  company  to  raise. 

The  Santa  Fe  has  been  an  exceptionally  prosperous  railway 
company,  and  yet  the  increasing  burdens  of  railway  operation 
make  it  imperative  that  the  company  should  have  such  increased 
revenues  if  it  is  to  fulfill  the  reasonable  expectations  of  the 
public  for  the  improvement  and  extension  of  the  transportation 
service.  If  such  imperative  need  exists  as  to  the  Santa  Fe  it 
exists  even  more  clearly  with  respect  to  numerous  other  less  for- 
tunate railway  companies  whose  transportation  service  calls  for 
the  expenditure  of  enormous  amounts  of  additional  capital  in 
order  to  keep  pace  with  the  increasing  demands  for  improve- 
ments and  extensions.  Comparatively  few  companies  have  been 
able  to  expend  in  improvements  and  extensions  amounts  of  cap- 
ital proportionately  as  great  as  the  Santa  Fe,  but  that  is  all  the 
stronger  reason  why  such  other  companies  should  be  protected 
against  undue  encroachment  upon  their  surplus  earnings  by  the 
rising  tide  of  expenses. 

The  problem  is  one  which  will  be  successfully  solved  if  it 
is   dealt   with   in   accordance   with   business   conditions.      If   the 


29 

business  of  the  country  continues  to  increase,  the  railway  com- 
panies will  be  able  to  raise  the  additional  capital  without  any 
undue  burden  in  any  direction,  provided  they  are  permitted  in  the 
adjustment  of  their  rates  to  regard  within  reasonable  limits 
those  conditions  which  control  the  prices  of  everything  else,  and, 
provided  further,  the  railway  companies  are  not  overwhelmed 
with  too  greatly  increased  operating  expenses  to  meet  the  public 
demands  for  additional  conveniences  and  comforts.  In  other 
words,  it  may  be  said  that  the  question  is  one  for  the  public  to 
decide.  It  must  either  be  satisfied  with  fewer  and  poorer  rail- 
way facilities  than  it  now  demands  or  it  must  permit  the  railways 
to  earn  more  net  revenue  to  enable  them  to  raise  the  money  to 
satisfy  those  demands. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 

This  book  is  DUE  on  the  last  date  stamped  below. 


^^CD-UHc 


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1970 


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